Types of Business Ownership

Business Ownership Types

Business ownership structures vary and it is for you to decide which type of business ownership or business structure is best for your new business when contemplating between legal structures. There are a number of factors to consider when thinking about which business ownership structures to choose from as it may impact business decisions:

• Tax implications - corporate income tax, personal income tax, tax exemption
• Personal liability
• Legal obligations
• Business income and Business debts
• Liability (whether the individual will be personally liable and have unlimited liability or whether the liability will be limited)
• Business structures/ Ownership Structure
• Business's profits
• How to raise capital
• Formal agreement requirements
• Public benefit/Benefit corporation
• Nonprofit Organizations

The types of business ownership available each have distinct features and different formalities for incorporation. For example private limited companies require registration at Companies House and are considered a legal entity due to it having a separate legal personality. There are a number of legal structures to choose from including business partnerships, small businesses, nonprofit corporations, limited liability partnerships or a sole proprietorship. Whichever legal structure or business entity you select, it is important you understand all the requirements.

Sole Proprietor/Sole Trader

A sole proprietorship is a business which has only one owner known as a sole trader, this individual trades on their own account. A benefit of being owning sole proprietorships is that it is easier to make decisions, it is more suited to smaller businesses with little or no external investment.

Sole traders are personally responsible for the debts of the business and liabilities incurred created by employees. There is no legal distinction between the sole trader and the business, there is no separate legal personality as would be the case with a limited liability company. As such the business will be impacted by the death or bankruptcy of the sole trader.

There is no formality to create a sole proprietorship, the proprietor can make his/her own decisions however the proprietor must register with the HMRC for tax and National Insurance purposes.

If the proprietor wants to transfer ownership, he/she must transfer all the personal assets owned by the business individually to the new owner.

Income tax must be paid on the proftits of the sole proprietorship business, whether the profits are retained in the business or withdrawn.

Partnership

A general partnership is a number of individuals trading together for profit. The size and scope of a general partnership may vary and decisions are generally made by the majority of all partners. The partnership deed/partnership agreement may be amended to allow more flexibility.

The partners are jointly and severally liable for all debts of the partnership business as there is no separate legal personality in ordinary partnerships as a result the partnership is impacted by death or bankruptcy of a partner.

Although there is no strict formality for a partnership, a partnership deed/partnership agreement is recommended. Similar to a sole proprietorship personal assets owned by the business need to be individually transferred to a new owner in cases of transferability.

Income Tax is payable by the partners regardless of whether profits are withdrawn or kept in the partnership business. Partners are taxed in accordance with their profit share entitlement.

Limited Liability Partnership

A limited liability partnership is similar to general partnerships however with the addition of a separate legal personality which allows limited liability for its members.

Members of the partnership are not liable for the debts of the business beyond their initial capital contribution and the terms of the partnership deed/agreement where applicable.

The partnership must be registered with Companies House, there needs to be a minimum of 2 members and a Certificate of Incorporation is required.

Similar to a limited liability company there is an on-going responsibility to submit required information to Companies House for example annual accounts submitted and audited.

Income Tax is payable by the partners regardless of whether profits are withdrawn or kept in the partnership business. Partners are taxed in accordance with their profit share entitlement.

Private Limited Companies/Limited Liability Company

A limited liability company is a business which is carried on by a legally separate incorporated entity. It allows members to have some degree of control over the decision making process whilst the day to day management is left for the directors and professional managers.

A private limited company business ownership structure includes shareholders, directors and/or managers. Liability of members for the debts incurred by the business (business liabilities the business incurs/business debts) are limited to their initial investment (i.e. the nominal value of their shareholding). As such a member will only be liable for a business debt up to the value of his/her shareholding. Business debts may include debts to HMRC, Income Tax, outstanding VAT returns, outstanding loans/credit etc. As there is separate legal personality, limited companies are unaffected by the death of its members.

The business must be registered at Companies House and the process of incorporating the business may be expensive.

If a member wishes to transfer his/her ownership, the shares of the company need to be transferred to the new member. It is important to review the Articles of Association and Shareholders Agreement to review any restrictions during the decision making process.

There is an ongoing requirement to submit information to Companies House, annual accounts must be produced and audited.

Corporation Tax is paid on gross profits, profits may be retained in the business or used to pay the directors fees or dividends to the shareholders. Any dividend paid out of the net profits will offset National Insurance liability.

The company must also pay Corporation Tax on the sale of a capital asset which is a chargeable gain. As the value of a share increases to reflect the profit, this capital increase is also subject to Capital Gains Tax.

Public Limited Companies

A public limited company is likely to be listed on a stock exchange, although it may elect not to be listed on the stock exchange as it is too small to qualify or because the business activity is limited.

A public company differs from a private company in its ownership structure, a public company is likely to have more members as it is open for members of the public when raising capital. The minimum share capital for a public company is £50,000 in contract to no minimum share capital needed for a private company.

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